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ITEM 7 / CRITICAL ACCOUNTING ESTIMATES.....................................................................................................................................................................................For longer-tail classes of business, we generally make actuarial assumptions with respect to the following:• Loss cost trend factors which are used to establish expected loss ratios for subsequent accident yearsbased on the projected loss ratios for prior accident years.• Expected edloss ratiosfor the latest accident year (i.e., accident year 2012 for the year-end 2012 lossreserve analysis) and, in some cases for accident years prior to the latest accident year. The expected lossratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend and theeffect of rate changes and other quantifiable factors on the loss ratio. For low-frequency, high-severityclasses such as excess casualty, expected loss ratios generally are used for at least the three most recentaccident years.• Loss development factors which are used to project the reported losses for each accident year to anultimate basis. Generally, the actual loss development factors observed from prior accident years would beused as a basis to determine the loss development factors for the subsequent accident years.We record quarterly changes in loss reserves for each of AIG Property Casualty’s classes of business. Theoverall change in our loss reserves is based on the sum of the changes for all classes of business. For most long-tailclasses of business, the quarterly loss reserve changes are based on the estimated current loss ratio for each classof coverage less any amounts paid. Also, any change in estimated ultimate losses from prior accident years deemedto be necessary based on the results of our latest reserve studies or large loss analysis, either positive or negative,is reflected in the loss reserve for the current quarter.Details of the Loss Reserving ProcessThe process of determining the current loss ratio for each class of business is based on a variety of factors.These include considerations such as: prior accident year and policy year loss ratios; rate changes; and changes incoverage, reinsurance, or mix of business. Other considerations include actual and anticipated changes in externalfactors such as trends in loss costs or in the legal and claims environment. The current loss ratio for each class ofbusiness is intended to represent our best estimate of the current loss ratio after reflecting all of the relevant factors.At the close of each quarter, the assumptions underlying the loss ratios are reviewed to determine if the loss ratiosremain appropriate. This process includes a review of the actual claims experience in the quarter, actual ratechanges achieved, actual changes in coverage, reinsurance or mix of business, and changes in other factors thatmay affect the loss ratio. When this review suggests that the initially determined loss ratio is no longer appropriate,the loss ratio for current business is changed to reflect the revised assumptions.We conduct a comprehensive loss reserve review at least annually for each AIG Property Casualtysubsidiary and class of business. The reserve analysis for each class of business is performed by the actuarialpersonnel who are most familiar with that class of business. In this process, the actuaries are required to makenumerous assumptions, including the selection of loss development factors and loss cost trend factors. They are alsorequired to determine and select the most appropriate actuarial methods for each business class. Additionally, theymust determine the segmentation of data that will enable the most suitable test of reserve adequacy. In the course ofthese detailed reserve reviews an actuarial central estimate of the loss reserve is determined. The sum of thesecentral estimates for each class of business provides an overall actuarial central estimate of the loss reserve for thatclass.In 2012, the third party actuarial reviews covered the majority of reserves held for our US Commercial long-tailclasses of business, the majority of our US Consumer classes of business and included several material internationalCommercial and Consumer classes of business. In addition we consulted with third party environmental litigation andengineering specialists, third party toxic tort claims professionals, third party clinical and public health specialists, thirdparty workers’ compensation claims adjusters and third party actuarial advisors to corroborate our conclusions.In 2011 we significantly expanded the scope of our 2010 third-party actuarial reviews to cover a larger number ofU.S. and international classes of business from the more complex reserves of long-tail classes of business. In 2010,..................................................................................................................................................................................................................................AIG 2012 Form 10-K 175
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES.....................................................................................................................................................................................third-party actuarial reserve reviews were generally limited to certain U.S. long-tail lines of business and wereconcentrated in the fourth quarter of 2010. These detailed reviews are conducted for each class of business for eachsubsidiary, and consist of hundreds of individual analyses.In determining the actual carried reserves, we consider both the internal actuarial central estimate andnumerous other internal and external factors, including:• an assessment of economic conditions;• changes in the legal, regulatory, judicial and social environment;• changes in medical cost trends (inflation, intensity and utilization of medical services)• underlying policy pricing, terms and conditions including attachment points and policy limits;• claims handling processes and enhancements; and• third-party actuarial reviews that are periodically performed for key classes of business.Loss reserve development can also be affected by commutations of assumed and ceded reinsurance agreements.Actuarial and Other Methods for Major Classes of BusinessIn testing the reserves for each class of business, our actuaries determine the most appropriate actuarialmethods. This determination is based on a variety of factors including the nature of the claims associated with theclass of business, such as the frequency or severity of the claims. Other factors considered include the lossdevelopment characteristics associated with the claims, the volume of claim data available for the applicable class,and the applicability of various actuarial methods to the class. In addition to determining the actuarial methods, theactuaries determine the appropriate loss reserve groupings of data. For example, we write many unique subclassesof professional liability. For pricing or other purposes, it is appropriate to evaluate the profitability of each subclassindividually. However, for purposes of estimating the loss reserves for professional liability, we believe it isappropriate to combine the subclasses into larger groups to produce a greater degree of credibility in the claimsexperience. This determination of data segmentation and actuarial methods is carefully considered for each class ofbusiness. The segmentation and actuarial methods chosen are those which together are expected to produce themost robust estimate of the loss reserves.The actuarial methods we use for most long-tail casualty classes of business include loss developmentmethods, expected loss ratio methods, including ‘‘Bornhuetter Ferguson’’ methods described below, andfrequency/severity models. Loss development methods utilize the actual loss development patterns from prioraccident years to project the reported losses to an ultimate basis for subsequent accident years. Loss developmentmethods generally are most appropriate for classes of business which exhibit a stable pattern of loss developmentfrom one accident year to the next, and for which the components of the classes have similar developmentcharacteristics. For example, property exposures would generally not be combined into the same class as casualtyexposures, and primary casualty exposures would generally not be combined into the same class as excess casualtyexposures. We generally use expected loss ratio methods in cases where the reported loss data lacks sufficientcredibility to utilize loss development methods, such as for new classes of business or for long-tail classes at earlystages of loss development. Frequency/severity models may be used where sufficient frequency counts are availableto apply such approaches.Expected loss ratio methods rely on the application of an expected loss ratio to the earned premium for theclass of business to determine the loss reserves. For example, an expected loss ratio of 70 percent applied to anearned premium base of $10 million for a class of business would generate an ultimate loss estimate of $7 million.Subtracting any reported paid losses and loss expense would result in the indicated loss reserve for this class. Underthe ‘‘Bornhuetter Ferguson’’ methods, the expected loss ratio is applied only to the expected unreported portion ofthe losses. For example, for a long-tail class of business for which only 10 percent of the losses are expected to bereported at the end of the accident year, the expected loss ratio would be applied to the 90 percent of the losses stillunreported. The actual reported losses at the end of the accident year would be added to determine the totalultimate loss estimate for the accident year. Subtracting the reported paid losses and loss expenses would result inthe indicated loss reserve. In the example above, the expected loss ratio of 70 percent would be multiplied by..................................................................................................................................................................................................................................176 AIG 2012 Form 10-K
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American International Group, Inc.2
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KEY FACTS & FIGURES52,000+ $65.7 bi
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■We said we would return to profi
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Financial HighlightsYears Ended Dec
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~63,000AIG EMPLOYEES AROUND THE WOR
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$115.1 millionAVERAGE CLAIMS PAID E
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$10,000MAXIMUM DONATION MADE BY AIG
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American International Group, Inc.F
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AMERICAN INTERNATIONAL GROUP, INC.A
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ITEM 1 / BUSINESS / AIG............
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ITEM 1 / BUSINESS / AIG............
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ITEM 1 / BUSINESS / AIG PROPERTY CA
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ITEM 1 / BUSINESS / AIG PROPERTY CA
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ITEM 1 / BUSINESS / AIG LIFE AND RE
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ITEM 1 / BUSINESS / OTHER OPERATION
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ITEM 1 / BUSINESS / OTHER OPERATION
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1A / RISK FACTORS.............
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ITEM 1B / UNRESOLVED STAFF COMMENTS
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ITEM 5 / MARKET FOR REGISTRANT’S
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ITEM 6 / SELECTED FINANCIAL DATA...
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ITEM 6 / SELECTED FINANCIAL DATA...
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ITEM 7 / MANAGEMENT’S DISCUSSION
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ITEM 7 / USE OF NON-GAAP MEASURES..
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ITEM 7 / EXECUTIVE SUMMARY.........
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ITEM 7 / RESULTS OF OPERATIONS.....
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ITEM 7 / LIQUIDITY AND CAPITAL RESO
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ITEM 7 / LIQUIDITY AND CAPITAL RESO
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Page 213 and 214: ITEM 7 / GLOSSARY..................
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Page 217 and 218: ITEM 7A / QUANTITATIVE AND QUALITAT
Page 219 and 220: ITEM 8 / INDEX TO FINANCIAL STATEME
Page 221 and 222: AMERICAN INTERNATIONAL GROUP, INC.C
Page 227 and 228: ITEM 8 / NOTE 1. BASIS OF PRESENTAT
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ITEM 8 / NOTE 3. SEGMENT INFORMATIO
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ITEM 8 / NOTE 4. DIVESTED BUSINESSE
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ITEM 8 / NOTE 4. DIVESTED BUSINESSE
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ITEM 8 / NOTE 5. BUSINESS COMBINATI
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ITEM 8 / NOTE 6. FAIR VALUE MEASURE
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ITEM 8 / NOTE 7. INVESTMENTS.......
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ITEM 8 / NOTE 8. LENDING ACTIVITIES
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ITEM 8 / NOTE 9. REINSURANCE.......
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ITEM 8 / NOTE 10. DEFERRED POLICY A
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ITEM 8 / NOTE 10. DEFERRED POLICY A
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ITEM 8 / NOTE 11. VARIABLE INTEREST
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ITEM 8 / NOTE 11. VARIABLE INTEREST
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ITEM 8 / NOTE 12. DERIVATIVES AND H
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ITEM 8 / NOTE 13. LIABILITY FOR UNP
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ITEM 8 / NOTE 14. VARIABLE LIFE AND
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ITEM 8 / NOTE 15. DEBT OUTSTANDING.
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ITEM 8 / NOTE 15. DEBT OUTSTANDING.
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ITEM 8 / NOTE 16. CONTINGENCIES, CO
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ITEM 8 / NOTE 17. TOTAL EQUITY.....
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ITEM 8 / NOTE 18. NONCONTROLLING IN
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ITEM 8 / NOTE 19. EARNINGS (LOSS) P
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ITEM 8 / NOTE 20. STATUTORY FINANCI
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ITEM 8 / NOTE 21. SHARE-BASED COMPE
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ITEM 8 / NOTE 21. SHARE-BASED COMPE
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ITEM 8 / NOTE 22. EMPLOYEE BENEFITS
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ITEM 8 / NOTE 24. INCOME TAXES.....
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ITEM 8 / NOTE 26. QUARTERLY FINANCI
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ITEM 8 / NOTE 27. INFORMATION PROVI
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PART II............................
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PART IV............................
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SignatureTitle/s/ ARTHUR C. MARTINE
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ExhibitNumber Description Location(
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Condensed Financial Information of
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Condensed Financial Information of
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Notes to Condensed Financial Inform
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Supplementary Insurance Information
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Valuation and Qualifying AccountsFo
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Subsidiaries of RegistrantExhibit 2
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Percentageof VotingSecuritiesJurisd
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Percentageof VotingSecuritiesJurisd
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CONSENT OF INDEPENDENT REGISTERED P
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CERTIFICATIONSI, Robert H. Benmosch
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CERTIFICATIONExhibit 32In connectio
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SECURITIES REGISTERED PURSUANT TO S
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American International Group, Inc.1
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